Business studies - Section Eight - Current Ratio

The middle part of a balance sheet shows a firm's current assets and current liabilites ('Current' means 'this year', basically.)

The current ratio compares a firm's current liabilities with its current assets

It shows whether the firm has enough money in (or coming into) the business to pay this year's debts.

Current ratio = current assets / current liabilities

Ideally the figure should be around 1.5 - showing the firm should be able to pay its bills easily.

If the result is below 1, the firm owes more than it has. That needn't be a problem if there's more money coming in soon. But the more below 1 the figure is, the less likely it is the firm will be able to pay its bills.

If the figure is above 2 the firm probably has too much money - it should invest more in the business

The current ratio assumes that the company will be able to turn stock into cash during the year. Unfortunately, there are no guarantees it'll be able to do this. Which is why there's another ratio - Acid Test Ratio